Growth and Value Styles

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 Plancorp team By: Plancorp team

Growth Stock

  • Traditional definition: A company whose earnings are expected to grow at an above-average rate relative to the market. From an identification standpoint, growth stocks are considered to be the 50% of the equity universe with the lowest book-to-market (BtM) ratios.
  • Academic view: Over extended periods of time, earnings are a poor predictor of stock price performance.

Value Stock

  • Traditional definition: A company whose stock trades for less than its intrinsic value…and has been undervalued by the market. From an identification standpoint, value stocks are considered to be the 50% of the equity universe with the highest book-to-market (BtM) ratios.
  • Academic view: Determining the intrinsic value of a company is at best a guessing game. Instead, value stocks generally trade at low prices because they are financially distressed companies that are out of favor with the market.

How the academics see it…

Remember, in the equity markets, returns come from taking risk. Since value stocks are by their nature riskier than growth stocks, value stocks should over time produce higher expected returns than their growth counterparts. In addition, the academic community looks at value in a different prism…defining it as a much deeper value than the traditional definition, i.e. a much higher book-to market version, and consequently, one that is riskier. Based on what we know about risk and return, investing in this deeper value play should over time produce higher expected returns than investing in either growth stocks or in more conventionally defined value stocks. The chart below points out the premium received over the 10 year period ending on 12/31/2009 for investing in the value universe of equities. There is a caveat, however: While the value premium persists most of the time, it doesn’t persist all of the time (note the 1-year return data for Growth and Value Index’s below).

1 yr/10 yr Annualized Total Returns

Growth Index 1 Year Return
Ending 12/31/09
10 Year Return
Ending 12/31/09
Value Index 1 Year Return
Ending 12/31/09
10 Year Return
Ending 12/31/09
Difference
Over 10 YR Period(BP Annualized)
Russell 1000
Growth
37.20% -3.98% Russell 1000
Value
19.69% 2.47% 645
Russell 2000
Growth
34.47% -1.38% Russell 1000
Value
20.56% 8.27% 965
Russell 3000
Growth
37.00% -3.79% Russell 1000
Value
19.74% 2.87% 666
MSCI EAFE
Growth
29.36% -1.30% MSCI EAFE
Value
34.23% 3.53% 483

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